Japan’s 10-Year Yields Fall, Match 7-Year Low, on BOJ Rate Cut

Japan’s 10-year bonds rose, with yields matching a seven-year low, after the Bank of Japan pledged to expand its balance sheet and lowered interest rates.

Ten-year futures climbed to the most since 2003 after the central bank said it may purchase government debt, exchange- traded funds and real-estate investment trusts. Demand for bonds also increased after Pacific Investment Management Co., which runs the world’s biggest bond fund, said it will be “difficult” for Japan’s economy to grow.

“There will be nothing left but a stone for the BOJ to buy,” said Akio Yoshino, who helps oversee the equivalent of $35 billion as chief economist at Amundi Japan Ltd. in Tokyo. “The bond market is reacting favorably to the BOJ’s bold step into unconventional measures.”

The yield on the 1 percent security due September 2020 fell 2.5 basis points to 0.91 percent as of 3:11 p.m. in Tokyo at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The price rose 0.23 yen to 100.821 yen. The yield dropped to as low as 0.895 percent, matching a level reached on Aug. 25 that was the lowest in seven years.

Ten-year bond futures for December delivery added 0.22 to 143.67 at the Tokyo Stock Exchange, the highest close since June 2003. Three-month euroyen futures for June delivery advanced as much as 0.02 to 99.750 at the Tokyo Financial Exchange.

The Bank of Japan lowered its benchmark interest rate to a range of zero percent to 0.1 percent from the previous 0.1 percent target, it said in a statement today after its two-day policy meeting. The BOJ will create a 5 trillion-yen ($60 billion) fund to buy assets including government bonds, it said.

‘Extremely Severe’

“I’m surprised by a broad range of assets the central bank considers buying,” said Amundi’s Yoshino.

The BOJ’s plan comes as Federal Reserve policy makers debate whether to implement a second round of so-called quantitative easing based on Treasury purchases, a policy that’s been called QE II.

“Financial markets are happy with the introduction of these aggressive policies, but at the same time they are skeptical about the effect," Tomohisa Fujiki, an interest-rate strategist at BNP Paribas Securities Japan Ltd. in Tokyo, said of the BOJ’s action. "We may expect further easing ahead, especially if the Fed goes into QE II.”

Japanese Economy Minister Banri Kaieda said yesterday that the country’s outlook is “extremely severe” in part because of the yen’s appreciation. A stronger yen reduces the value of overseas sales at Japanese companies when repatriated.

The yen traded at 83.79 per dollar today. Its rally to a 15-year high of 82.88 on Sept. 15 spurred Japan to unilaterally intervene to weaken the currency for the first time since 2004.

“It is difficult to generate growth given Japan’s deflationary and demographic realities,” Paul McCulley, a managing director at California-based Pimco, said on the company’s website. “Japan has limited political willingness to boldly pursue reflationary policies, and they have major doubts as to the effectiveness of such measures, even if tried.”

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